Within less than 30 years, Wal-Mart had transformed from a small rural retailer in Arkansas into the largest retailer in the U.S. In order to continue this rapid growth, the company had started to pursue international expansion grounded in the belief that the firm’s business model of offering quality products at low prices and great customer service would appeal to consumers everywhere around the world (p.8). China was of particular interest in going international as Wal-Mart’s top management held the opinion that it was the only market in which the firm’s success story in the U.S. could be repeated (p.2/8). However, in 2005 (nine years after its market entry), Wal-Mart was far away from replicating its domestic success story in China. The retailer experienced losses in China and was trailing behind domestic as well as international rivals like Carrefour that featured sales twice as high as Wal-Mart’s (p.17).
II. Analysis of Issues and Problems
According to its poor performance, Wal-Mart was facing the issue how it could compete successfully in the Chinese market. Of particular interest was thereby the question whether Wal-Mart could become successful by duplicating its domestic business model. Beyond, the question how such a model could be effectively implemented in the Chinese market arose. On the one hand, the Chinese market appeared attractive and suitable for Wal-Mart’s business model with its “Every Day Low Prices” due to the “vast size in land and population, an emerging middle class optimistic and eager to spend, and consumers’ relentless pursuit of value” (p.1). Additionally, predicted annual growth rates of eight to ten percent would increase China’s annual retail sales to US$ 2.4 trillion by 2020, thus making it a major market in the future (p.9). On the other hand, the Chinese market also imposed several challenges and hurdles on Wal-Mart which precluded it from duplicating its domestic business model and success story.
The Chinese market was characterized by significant differences in income between rural and urban populations and between coastal and inland regions (p.9/11/26). Accordingly, retail sales in urban areas grew faster than in rural areas, resulting in sales in urban areas accounting for over 60 percent of total retail sales in 2002 (p.22). These differences were reflected in both the extent and the disparity of consumption patterns (p.11). As a result of this absence of a national market, it was expensive for Wal-Mart to serve customers in different regions because it couldn’t unify its merchandising or marketing strategy. Additionally, low income in rural areas forced Wal-Mart to deviate from its practice of opening stores in smaller communities and to concentrate on more costly, urban locations (p.12).
Chinese Consumer Behavior
Consumer loyalty was difficult to build as Chinese consumers were rather impulsive and were always looking for the best bargain. Instead of buying in bulk, Chinese also preferred more frequent purchases with small amounts of goods, thus being contrary to the rationale of the hypermarket format. Furthermore, freshness of food was of a major importance to consumers. This caused the retailer to source products locally, thus diminishing economies of scale. All these behaviors of Chinese consumers increased Wal-Mart’s operational costs in serving them (p.15).
The Chinese retail market was highly competitive with both international and domestic players rivaling. While international retailers like Wal-Mart were well equipped with expertise and capital to fund their long-term plans, domestic retailers could leverage their established local networks and superior locations. International and domestic players differed further in their usual store formats as domestic players concentrated on the supermarket format while...